Chips Face Tough Times, Says Sanghi

SAN JOSE, Calif. — The semiconductor industry's business model "is really broken" with more belt tightening and consolidation ahead, said Steve Sanghi, the chief executive of Microchip, speaking in a candid interview from the EE Live! show floor.

"We are evolving to a slower-growth industry, and even though Microchip is still growing we will eventually converge to the mean," said Sanghi who has led the microcontroller vendor through generally increasing revenues since 1990.

The go-go days of double-digit revenue growth are over as the chip business settles into a middle age measured by mid-single-digit annual growth, Sanghi believes. The change also marks the end of the days when customers routinely saw 8% annual reductions in chip prices and employees pocketed 5% annual raises, he said.

In the new environment, chip buyers will pay flat or rising prices. Employees will compete for merit raises that come on a more graduated schedule. And chipmakers will continue acquiring each other to fuel growth.

"We are working on the entire puzzle, and hence we are coping well, but it's not without stress," said Sanghi. The changes have sweeping "impact on customers, retention -- the whole supply chain."

The days of forward-pricing chips based on expected advances in process technology are over, Sanghi told us. "The industry has to change its practices -- you have to make money today, because no one will let you make it tomorrow."

Chips are commodity ingredients. Flour, eggs, and sugar are low-priced commodities. Once someone correctly mixes them together, they can get a branded cookie in nice packaging that tastes great and is ready to eat! No one is going to pay more than bottom dollar for the cookie ingredients but the cookies are another story.

If chips had a low cost of invention, all that would do is bring the cost down. Competition would rapidly destroy the extra margin that could have been realized by a low development cost.

I'm not sure it's even about systems. Look at pebble , the smartwatch company. Yes it'll make some money , but in short while ,archos is going to offer a $50 smartwatch and suck out a lot of the money from that market, unless pebble has unique value that's hard to copy. Maybe its micro-apps will be that, maybe not.

On the other hand, it's not rocket science to build/invent a smart watch(they build the prototypes using arduino), and they did made some money(and had a potential chance for ackuisition) , so it could be a good return on investment. Not VC like return(they got spoiled by app companies), but still good.

So maybe those are the right expectations for a system company ?And a chip company ?

Absolutely Wall Street is working correctly. If you sell a complex product whose price is based upon the cost of goods rather than the perceived value, you are selling something anyone can do. That's the problem that needs to be solved.

A company can ride out the innovations of the original entrepreneurial team only so far. But in the semiconductor business, most of those guys have left the building (like Elvis). Even Sanghi, according to this article, is planning on leaving soon. What is left is generally people who keep that "stone wheel" turning, but that only lasts so long before a new generation of entrepreneurs further up the food chain take over.

The semiconductor companies are exactly where the module companies were in the 1980s when higher performance was available on an IC, many times for less money. And the module companies displaced the discrete component companies before them. Now we are at the point in technology evolution where it is all about systems.

Today, most systems are unique, so it is not generally possible to define a system level IC that is used by many—a conflicting requirement for successful semiconductor products. But that too will eventually change much like the world of mobile computing where only a few companies provide sufficiently adequate solutions. And as you point out, if one has a successful system definition, one can go out and do the IC design themselves for less money using readily available resources. So where does that leave the generalists? The semiconductor companies. Well, if you don't have a secret sauce, you either go mix up a new sauce or plan on obsolescence. Just like the discrete guys and module guys before them.

I'm sorry but this story is a joke. Maybe Microchip's business is slowing because of you Sanghi. You are in a market that is easy to do. You are competing with multiple other competitors. So many people make this little $2 or $5 microcontroller. They are jelly beans.

Are you in any mobile phone designs? If not, why not? Is it because you missed the boat on mobile? I see a lot of growth in mobile phones. I see Qualcomm exploding. They can't build new buildings fast enough to keep up with the hiring needed.

If I were a Microchip shareholder, I would basically want you fired for what seems like giving up. If I was a Microchip employee, I would be looking for a new job.

Hi Alex, you're right. The prices are set by supply and demand. When parts all do roughly the same thing, they are a commodity. You're not going to buy the $1 part when you can get a $0.50 one for the same price. It seems like the parts should sell for a lot more. Once upon a time a transistor was pricey. As soon as one competitor figures out how to drive the cost down, it's offered at a lower price and it's a race to the bottom.

It's very hard to add value to products if the spec is all that matters. One purse that holds 1 L doesn't sell for the same price as other purses that hold 1 L because there is a great difference in perceived value. In electronics this difference is largely zero... trust that the part will work as advertised may still be worth something.

The only way a chip is going to command top dollar is if it can do something important that no other chip/solution can do.

Hi Scott, the economics of the industry work as they should. I know it feels like all that sweat and blood should yield more than a 50 cent part. You're struggling with the notion of value. Surely a microcontroller is worth more than a candy bar that requires zero risk or R&D, right? Well... not according to the machinations of the market.